Nigeria’s inflation seen hitting 30% on Tinubu’s reforms

The annual inflation rate in Nigeria is expected to surge to more than 30 percent in coming months following the devaluation of the country’s currency and the removal of petrol subsidy, Capital Economics has said.

President Bola Tinubu, who took the helm at Africa’s biggest economy on May 29, is pushing ahead with reform efforts in a bid to woo investors and stimulate growth.

Nigeria’s headline inflation rate rose to a fresh 17-year high of 22.4 percent year-on-year in May from 22.2 percent in April, official data released on Thursday showed.

“The recent removal of fuel subsidies alongside yesterday’s devaluation of the naira mean that it is likely to surge to more than 30% y/y over the coming months,” the Deputy Chief Emerging Markets Economist at Capital Economics, Jason Tuvey, said.

“The central bank looks set to respond with further monetary tightening.”

In month-on-month terms, prices rose by 2.0 percent – the largest increase in seven years, according to the UK-based economic research firm.

It said the breakdown showed that the rise in the headline rate was driven by higher food and transport inflation, which increased to 24.7 percent y/y in May and 23.9 percent y/y.

“A poor inflation picture will only get worse. Fuel subsidies were removed in the wake of President Tinubu’s inauguration, with prices at the pumps almost trebling. Meanwhile, the devaluation of the naira implemented yesterday – and confirmed by the CBN last night – has seen the currency fall by as much as 35% against the dollar (although there is currently a lot of volatility),” Tuvey said.

He said both of these factors would push inflation up further, although the impact of the devaluation would be stymied by the fact that the prices of a large share of imported goods were already based on the weaker parallel rate. 

“Regardless, we expect inflation to breach 30 percent y/y in the coming months, with the risks to the upside,” he added. 

Capital Economics expects the Central Bank of Nigeria to raise its key interest rate next month.

“We’ve pencilled in 300bp of hikes, to 21.50 percent, by year-end, although (once again) the risks are tilted towards higher rates,” it said.